Although inflation continues to push prices higher and higher, you might save a little more money starting next year.
Thanks to a new change that the IRS made for inflation adjustments to federal income tax brackets starting in 2023, more of your income will be subject to lower tax rates in 2023 than in 2022, and you might be able to keep a higher amount of income due to this.
Mark Luscombe, a federal tax analyst, said that there was a high likelihood of people seeing an increase in their paychecks beginning in January because of the IRS inflation adjustments, which will result in lower withholding for specific levels of income.
The expected tax changes will not impact the 2022 tax return taxpayers must file by April next year. The changes will start for the returns people file in 2024, but will reduce the estimated taxes paid in 2023. The adjustments to the tax brackets mean that the standard deductions will also change.
Here is a simple explanation of how it works:
There are seven income tax rates at which the federal government taxes earned income. The percentages include 10%, 12%, 22%, 24%, 32%, 35%, and 37%. A tax bracket is a person’s income range that is subject to each of those tax rates.
The more a person earns, the higher the tax bracket. Recently, the IRS increased each tax bracket by about 7%, so you need to earn roughly 7% more to move to a higher tax bracket. If your income doesn’t increase by 7% in 2023, the inflation adjustment will help you pay less in taxes, even though your income stays the same.
Here is the full breakdown of the inflation adjustments starting in 2023:
- 10% for the first $11,000 of income for all single filers ($22,000 for married people who file taxes jointly)
- 12% for income above $11,000 ($22,000 for people filing jointly)
- 22% for income above $44,725 ($89,450 for joint filers)
- 24% for income above $95,375 ($190,750 for joint filers)
- 32% for income above $182,100 ($364,200 for joint filers)
- 37% for income above $578,125($693,750 for joint filers)
The standard deduction will go up by $900 for single filers to $13,850, while the deduction for married couples who file joint taxes will go up by $1,800 to reach $27,700.
Standard deduction refers to an amount of money that people who don’t itemize their deductions can subtract from their income before taxation, reducing the amount of income for which they are taxed.
The IRS also announced additional tax benefits starting in 2023. From next year, people will be allowed to contribute up to $3,050 to a healthcare account that will cover some healthcare costs that are not covered by health insurance. Because the amount is deductible from your income, it will reduce the amount of taxes taken from your income.
The Earned Income Tax Credit will allow taxpayers from low-income households with three or more qualifying children to keep their hard-earned money as the EITC amount will increase from $6,935 to $7,430.
The foreign-earned income exclusion will also go up by $8,000 to $120,000, up from this year’s $112,000.